Born into darkness: FEI in the 1930s; Financial Executives International (FEI) was born against a backdrop of deep economic troubles. The organization was launched to help financial executives set the professional and ethical tone for their peers for decades to come.

It was a terrible time in the U.S., the dark December of 1931.
Eight million workers had no work. Banks closed. Businesses failed.
Investment evaporated. Bankruptcy prevailed. The Dow Jones had dropped
to a miserable 41, down from 400, and radicals were questioning the
viability of capitalism.

News from the rest of the world was no better. England had just
abandoned the gold standard, Japan had invaded Manchuria and Stalin was
collectivizing agriculture in the Soviet Union. In Germany, the Nazis
held 18 percent of the Reichstag and Mein Kampf was a bestseller.

Two days before the end of that year, eight corporate controllers
met in New York City. Their conversation may not have bubbled with
economic optimism, but their agenda carried a spark of hope. That agenda
was to complete the final details to launch a new organization of
financial executives, The Controllers Institute of America. They needed
an organization that would let them agree on practical standards and an
ethical ideal. They needed to define their profession, exchange ideas
about its practice, educate themselves and others, and work with the
government to improve the general economy. In short, they wanted to
dignify the practice of accountancy at the level of corporate
leadership.

The causes of the Great Depression had little to do with these
financial executives, but if the nation's crisis had a cure, they
believed it was, to a certain extent, in their hands. After all, it was
an economic crisis, and they were the men who controlled the money.

The roots of the problem went back 10 years, across a decade of
apparent prosperity supported tenuously by credit. Tax breaks for the
well-off had engorged the wealthy. Production soared, but middle-class
incomes didn't keep up. Consumers enticed by marvelous new vehicles
and appliances felt the need to own what they could not pay for.
Irrationally exuberant investors, wild with optimism, leveraged the
stock market to breathtaking altitudes.

Then, in a week in late October 1929, the credit ran out. In the
ensuing months, sales fell, profits plummeted, the stock market crashed,
borrowers defaulted, lenders went broke and productivity slowed as if
seized by rust. It wasn't just a downturn in the market: It was the
collapse of an economy.

President Herbert Hoover, a staunchly pro-business Republican,
defended the strength of the economy. The problem, he said, was in the
federal budget. Only a balanced budget would sustain public confidence.
So he slashed spending, raised taxes and refused to let federal
assistance undermine American self-reliance.

But as his efforts reduced demand, they aggravated the crisis. In a
last-ditch effort to protect the economy, Hoover signed the Hawley-Smoot
tariff on imported goods, the highest import tax in U.S. history. As
European nations retaliated with their own tariffs, international trade
withered away, and America's Great Depression went global.

Early in 1932, the founders of the new Controllers Institute of
America scraped together some cash and leased space at One East 42nd
Street in New York City. The first four months were rent-free because
nobody wanted the space. The full-year rent was $1,000. On February 4,
The Institute had 50 members; that number doubled to 100 by April. They
kept a tight rein on expenses and closed their fiscal year in August
with a bank balance of $47.65.

The country's finances went less well. As banks went broke,
people lost their savings. Hearing rumors of a bank's demise caused
citizens all but rioted to withdraw their money. As the end of 1932
approached, the whole banking system teetered on collapse, and the
economy went from bad to worse to dismal. Investment dropped to 5
percent of its 1929 level. Inventory sat unsold, unemployment continued
to rise and drought in the Midwest baked the national breadbasket to
dust. Homeless people living in so-called "Hoovervilles" grew
on the outskirts of towns. In June 1932, 20,000 hungry World War I
veterans marched on Washington, D.C., demanding their bonuses, only to
be dispersed by federal troops with tear gas and bayonets.

As the election of 1932 approached, President Hoover took a step to
the left, offering emergency loans to banks and tossing a little money
into public works. His calling on the nation's "haves" to
be charitable to the "have-nots," was apparently too little,
too late. In November, Americans elected the Democrat candidate,
Franklin Delano Roosevelt, hoping that his New Deal might work better
than the deal they had.

The country had never seen anything like it. And history would
record the events following The Great Depression as a watershed crisis
that would change the relationship between the federal government and
the nation's people and businesses.

Roosevelt's large electoral majority gave him weight with
Congress. To make certain that Congress understood his mandate,
Roosevelt's inaugural address threatened a seizure of "broad
executive power to wage a war against the emergency, as great as the
power that would be given me if we were in fact to be invaded by a
foreign foe." Whether in fear or desperation, Congress heeded the
new president with a 100-day honeymoon. On March 6, he declared a
nationwide bank holiday. Three days later, Congress passed the Emergency
Banking Act, which provided for inspections of federal banks.

Over the next week, the U.S. Treasury Department and Federal
Reserve examined the financial conditions of the nation's banks.
Those found stable were allowed to reopen, and others were permanently
closed. In the first of his "fireside chats," Roosevelt said:
"I can assure you that it is safer to keep your money in a reopened
bank than under the mattress."

If Roosevelt's assurance seems unnecessary today, it's
only because of the Glass-Steagall Banking Act, passed that summer.
Glass-Steagall created the Federal Deposit Insurance Corporation (FDIC),
which backed deposits at member banks. Glass-Steagall also put up a
firewall between two kinds of banks--commercial and investment.
Commercial banks couldn't invest in, underwrite or distribute
corporate securities. Investment banks couldn't accept deposits.

Roosevelt also used that first week in office to pass the
Agricultural Adjustment Act of 1933 (AAA), an effort to stimulate the
economy by giving farmers more purchasing power. It supported prices by
paying farmers not to grow staples. The AAA made commodities into a kind
of currency that allowed farmers to use their crops to buy supplies and
equipment.

Then, in June of 1933, Congress passed the National Industrial
Recovery Act (NIRA), creating the National Recovery Administration (NRA)
and the Federal Emergency Relief Administration. The NRA allowed trade
associations to agree on "codes of fair competition" that
would help stabilize prices and production--cooperative activities that
had been illegal under antitrust laws. The agreements that associations
reached could, with the president's approval, be imposed on all
companies in a given sector.

Roosevelt's sweeping presidential power lasted only a couple
of years. The Supreme Court ruled that this presidential approval
constituted the creating of law, which the Constitution reserves for
Congress alone.

Nonetheless, the NIRA was a significant precedent. It demonstrated
the value of private-sector cooperation--a concept that would figure
heavily in accounting and finance. It also lent a certain federal power
to private-sector initiatives. The NIRA also gave unions and workers new
powers, which they were quick to use.

Over the next three years, millions of workers went on strike. Over
18,000 strikers were dragged from picket lines and thrown in jail, and
scores were murdered. Despite the general desperation for jobs, few
crossed the picket lines. During these turbulent times, just about
everyone agreed on one thing: America needed a drink! All they had to do
was amend the Constitution. So, on Dec. 5, 1933, President Roosevelt
ratified the 21st amendment, ending 13 years of Prohibition.

On Jan. 31, 1934, the Gold Reserve Act transferred all gold and
gold certificates from the Federal Reserve to the U.S. Treasury. A day
later, the president raised the value of a troy ounce of gold from
$20.67 to $35. The de facto devaluation of the dollar was meant to
increase exports.

[ILLUSTRATION OMITTED]

During these hard years, Roosevelt kept trying to work with a
balanced budget or at least borrow no more than needed to prevent
catastrophic suffering. But in 1934, John Maynard Keynes, a British
economist, visited the White House and presented a radical idea: that by
spending its way into a deficit, a government could fuel an economy with
the cash it needed to stimulate consumption, production and investment.
Roosevelt doubted the Keynes counterintuitive "rigmarole of
figures"--as did most economists--but he didn't forget it.

[ILLUSTRATION OMITTED]

New Publication, Legislation

February 1934 brought two interesting developments: The Controllers
Institute published the first issue of a new magazine, The Controller
(see the "editorial comment" below from the first issue), with
a subscription price of $4.00 per year; and Congress passed the
Securities and Exchange Act (SEA), the most powerful piece of
legislation that had ever hit public companies.

The SEA came on the heels of congressional investigations into a
host of stock market scandals. Americans suddenly understood why the
United Kingdom had been regulating its stock market for almost 100
years. The Act established the Securities and Exchange Commission (SEC)
and gave it power over stock exchange rules, financial reporting and the
trading of securities. Many shady but standard trading practices were
outlawed as a host of new regulations were put in place.

[ILLUSTRATION OMITTED]

The first issue of The Controller was published too early to
mention the SEA or the SEC, but the lead article broached the hottest
issue of the day: "Why Should We Not Return to [the] Gold Standard,
with Limitations?" By March, The Controller was echoing the future.
"Institute Seeks Facts Concerning Burdensome Questionnaires,
Reports" was the title of one short call for contributions. Its
last paragraph might well appear in a current issue of Financial
Executive: "It is conceded that many of the reports required are
unnecessary and that they are valueless when completed, because of the
time required to compile them."

Though still a nascent publication, The Controller was already
grappling with an industry/government tug-of-war that would last into
the next century. The June 1934 issue continued the prescient reportage
with three similarly ominous articles: "Controllers Protest Against
Numerous Reports for Government," "Questions Concerning New
Depreciation Ruling Answered" and "Complex Regulations Costly
to Corporations." A case of deja vu all over again?

In the larger economic picture, despite Roosevelt's New Deal,
the economy remained all but comatose, and Roosevelt continued brewing
his alphabet soup of federal agencies and programs. The Federal Housing
Administration (FHA) provided mortgage relief; the Federal Emergency
Relief Administration (FERA) directed grants to states; the Civilian
Conservation Corps (CCC) made work for thousands of young men; the
Tennessee Valley Authority (TVA) created jobs by controlling flooding,
improving river navigation and building dams; and the Rural Electric
Administration (REA) expanded the nation's power grid.

Economic collapse is always an invitation for political threats. In
Russia, chronic poverty had helped spark the Bolshevik revolution, and
in Germany, the hyperinflation following World War I was a rallying cry
for the up-and-coming Nazi party. These foreign developments were not
unnoticed in American boardrooms. The September 1934 issue of The
Controller recognized the threat with: "Business Men Called on to
Stop Drift into Communism or Fascism."

Then, a new wave of legislation in 1935--the Second New
Deal--brought more reforms and programs. The National Labor Relations
Act of 1935 (NLRA), also known as the Wagner Act, gave federal
protection to collective bargaining; The Public Utility Holding Company
Act (PUHCA) limited the size and practices of utilities and their parent
companies; the Social Security Act of 1935 (SSA) started not only a
retirement fund and unemployment insurance but the principles of what
some would later call the "welfare state."

In January of that year an article in The Controller again
identified a problem that would plague the profession for decades:
"A Public Accountant's Views as to Duties and Rank of
Controller," authored by a CPA in Chicago, a Mr. Arthur Andersen.
The first sentence of his article read: "During the past five
years, most businessmen have had reason to doubt the theories and
principles of business conduct which previously served them as
dependable guides, and many concepts have perforce been changed."

Issues of The Controller continued with articles that would
resonate through the decades. In February: "What Is Material Fact,
What Is Prudent Investor?" In March: "complicated Laws Weak
Feature of Federal Tax System." In October: "What Is [the]
Most Satisfactory Form of Reports to Stockholders?" In November:
"When Controller's Ethical Standards Differ from His
Company's."

As the New Deal agencies created new rules and regulations,
executives wrestled with the vagaries of financial reporting. The
Controller reported the frustrations of controlling the indefinable. In
February 1936: "Writing of Reports to Stockholders an Art, Says
Controller." In February 1937: "Law Requires Controller to
Guess at Best Financial Policies." In March 1937: "What Are
'Accepted' Accounting Principles, Attorney Inquires."

The Fair Labor Standards Act of 1938 (FLSA), mandating minimum
wages and maximum hours, was about the last of the New Deal legislation.
That year was also the year that Roosevelt decided to try a little
Keynesian economics. His first attempts at deficit spending were too
conservative to work, but by the end of the decade, he had no choice.
With the Nazis declaring their intent to take over Europe first and then
the world, and with the Japanese invading China, he had to build an
"arsenal of democracy," and the money for financing would have
to come from the mint, not from pockets of impoverished taxpayers.

Ironically, the September 1939 issue of The Controller went to
press on the first of the month carrying an article under the headline
"Controller Just Back from Europe Believes There Will Be No
War." Before its ink had dried, German tanks were rolling into
Poland, and America's financial executives were about to face a
problem that made the New Deal and Great Depression look easy.

In June of 1940, the Council of National Defense called for
top-level financial executives to help with war-related business, and 16
members of The Controllers Institute of America immediately stepped up
to respond. The Depression was behind them. Now it was a time of war.

Thus, the economic crucible of the 1930s gave birth to a new kind
of government, a new kind of business environment and a new kind of
organization linking the two. Over the next 75 years, The Controllers
Institute would expand to become Financial Executives International
(FEI), a global organization continually striving to provide
professional and ethical leadership and become the voice of those it
serves before regulators in Washington, D.C.

The next FEI at 75 feature: Globalization of Business.

Glenn Alan Cheney (gcheney@adelphia.net) writes on finance,
accounting and business issues, and is a frequent contributor to
Financial Executive.

How The Controllers Institute of America Grew in Early Years
Number of Members Date
30 December 1931
100 April 1932
200 November 1933
300 June 1934
400 April 1935
500 January 1936
666 August 1936

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